Spending patterns in retirement a confusing issue

Who says what about how much retirees are spending – and when.

Spending patterns in retirement a confusing issue

Retiree spending patterns are a pivotal part of planning, yet there appears to be confusion as to what actually happens in retirement.

A US study by JPMorgan Asset Management using de-identified credit card, debit card, electronic payments and ATM transactions for 12 months in 2016 came away with three main conclusions:

  1. Overall spending levels decline with age on a real dollar basis.
  2. There is a spending surge leading up to retirement.
  3. Retirees experience spending volatility as they transition into retirement.

However, the Australian Centre for Financial Studies (ACFS) analysed data from Household Income and Labour Dynamics in Australia (HILDA) – derived from annual panel surveys undertaken with 9500 households across Australia since 2002 – and came away with different findings. It found that:

Households do not show a decline in expenditure through the course of retirement
ACFS says that a common theme in retirement literature is the expectation that household expenditure will decline as retirees lose mobility and reduce discretionary spending. “However, the HILDA data shows that retired households aged 73–76 in the 2014 survey did not report lower expenditure for their household on an inflation-adjusted basis than they did in the 2006 or 2010 surveys. Households in the 83–86 age range reported slightly higher expenditure than in 2006 and 2010,” it says.

“The composition of household spending was fairly constant in the early years of retirement. However, after age 75, expenditure on food decreased slightly and expenditure on utilities increased slightly.”

Today’s retirees are spending more than earlier retirees did at a similar age
In the 2014 HILDA survey, retirees in all age brackets reported a higher level of expenditure (inflation adjusted basis) than their cohorts in the 2006 survey. The biggest increase in expenditure was in the 85-plus age group. Reported average annual expenditure in this cohort increased from $20,017 per annum in 2006 to $27,279 in 2014, or a 36 per cent increase.

The level of household expenditure varies more according to geographic location than it does by level of income
There is a bigger difference in household expenditure according to urban or rural living than there is by income deciles. The biggest difference in the level of expenditure was between households located in Sydney, where household expenditure was $44,672 on average, as against households located in regional South Australia, where household expenditure was $22,017 on average in 2014.

This is the wealthiest retired generation ever in Australian history, with household wealth and income continuing to increase with each successive HILDA survey
Households in their late 50s in 2014 held 25–40 per cent more net wealth than their same-aged peers reported in 2002 (inflation adjusted). The average net wealth of households aged 70–74 has more than doubled since 2002, from $562,000 to more than $1 million.

Early stage retirees are wealthier than ever before, possibly setting higher expectations for the standard of living in retirement.

Median wealth shows similar growth over the period, with 74 per cent growth in wealth for households aged 70–74 and 36 per cent for households aged 55–59, but at a much lower level. The median wealth of a household aged 65–69 in 2014 was $685,000, compared with average household wealth of $1.24 million.

After reviewing the HILDA data, investment management company Challenger concluded that retirees’ spending on regular essentials remained broadly constant in real terms, although older retirees spent less than younger retirees.

“The same is not true for total spending,” it says. “Household expenditure data from the ABS shows that total spending falls with age. Older retirees spend a smaller proportion of their total spending on ‘wants’, with a higher proportion being spent on needs. While the needs are broadly constant, the reduction in ‘wants’ leads to a decline in overall spending.” 

What is your experience of retirement spending patterns? Do you spend more at the start of retirement and less as the years roll on? Or is overall spending consistent?

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    COMMENTS

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    sunny
    15th Aug 2019
    12:41pm
    Disagree. I spend on food, petrol, general maintenance, utilities and put away for a holiday wherever. There are so many good quality op shops around, if you’re not overly fussy. And I don’t think that’s being frivolous.
    ozirules
    15th Aug 2019
    1:10pm
    my spending increased with retirement due to having more time on my hands. Extra travel and entertainment expenses and with more time at home extra household expenses. An increase in medical expenses also accounted for a spike in spending. It's a mistake to factor in less spending in a retirement plan if you are planning to enjoy rather than endure retirement.
    KB
    15th Aug 2019
    1:19pm
    Disagree. I spend a fair proportion of my income on food utilities and health care I spend more on. my needs than my wants. A holiday is saved for .Borrow books from library which is frees Always watching the budget People planning to retire must facor in health care which can be very expensive
    KB
    15th Aug 2019
    1:19pm
    Disagree. I spend a fair proportion of my income on food utilities and health care I spend more on. my needs than my wants. A holiday is saved for .Borrow books from library which is frees Always watching the budget People planning to retire must facor in health care which can be very expensive
    Rae
    15th Aug 2019
    1:30pm
    Net wealth is an illusion. A good old fashioned market correction and it will all be gone. Income in real $$$ per fortnight is the only real wealth and it's not that terrific as retail and hospitality sales reflect.
    GeorgeM
    15th Aug 2019
    2:49pm
    What stood out in this article was the comment:
    "The biggest difference in the level of expenditure was between households located in Sydney, where household expenditure was $44,672 on average, as against households located in regional South Australia, where household expenditure was $22,017 on average in 2014."

    Consider that in the context of the stupid Income and especially the Asset Test rules the Govt applies for Age Pensions without considering where you live. It is another argument to get rid of all such rules and give Universal Age Pension based only on Age and Residency tests, then you can choose where you want to live, whether to downsize or not, work or not, etc, etc. Unless the Govt wants to pay depending on where you live! Not a word from any commentators in the article or the Govt about that idea, and not holding my breath!
    Briar
    16th Aug 2019
    3:46pm
    I have been retired for 7 years. I am a single female in my mid 70's and I find I am spending more now than I was when I first retired just so I can pay my bills and feed myself and my dog. Before I retired I upgraded my ageing appliances, installed solar panels, bought a new car, all measures to make life more comfortable and enjoyable. I live on a part UK pension, a part Centrelink pension, and a small amount of super as I was a single parent and worked part-time for many years to be there for my children either end of the school day until they left school. I have a small amount of money in a term deposit that I scraped to save and that I am deemed to earn much more interest than I really do, and I am now having to draw down on the interest to supplement my basic living expenses. I planned my finances for my retirement very carefully, and thought that I would have a reasonable lifestyle until I was in my late 80's on the annual income I would have. However this is proving not to be the case. I have had health issues, as we all do at our age, and I have so far continued to keep my health insurance current by reducing expenditure on everything else I can. How long this will continue though is up for discussion. The only holidays I have away from home are when I visit one of my offspring and family on the other side of the country, and they fund my fares. I manage so far but wonder for how much longer as there is only so much you can cut back on.
    Briar
    16th Aug 2019
    4:08pm
    So to answer the question if I spend more as I age, the answer is equivocally YES because the cost of everything has escalated much more than expected.


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